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Hershey looking to accelerate expansion in Asia

Hershey’s latest results for the 2008 financial year and the first quarter of 2009 show the company’s strong resistance to the effects of the ongoing global economic downturn.

The company reported almost 4% growth in net sales in 2008 compared to the previous year and sales gains from international businesses with rapid volume growth were particularly relevant contributors to the positive growth rates, even though in constant actual value terms sales from outside the US accounted for less than 15% of total revenue in 2008.

As part of Hershey’s global growth strategy, it is significantly increasing its investment in markets outside the US, particularly India and China.

In the first half of 2009 the company acquired the exclusive licence to the Van Houten brand and related trademarks from Barry Callebaut in the Asian-Pacific, Middle Eastern, Australian and New Zealand markets. Hershey’s expansion activities are also intensifying in India as Godrej Hershey Foods and Beverages Ltd, a joint venture between Godrej Beverages and Foods Ltd and Hershey, is planning to introduce products from Hershey’s international portfolio to the Indian market.

Growing Asian chocolate confectionery market

Hershey’s expansion in recent years in the Asian confectionery market has also been fuelled by the advantageous positioning of its predominantly chocolate confectionery portfolio. The growing Asian economies and rising consumer affluence have resulted in consumers gradually trading up from sugar to chocolate confectionery. The category is expected to outperform both sugar confectionery and gum over the 2008-2013 forecast period.

One of Hershey’s latest moves in the Asian region saw it gain the exclusive licence to the Van Houten label, which is one of the most popular brands in chocolate confectionery and chocolate-based flavoured powder drinks in many Asian markets, such as Singapore, Indonesia and Vietnam, with annual retail value sales of around US$60 million (2007). This deal complements Hershey’s existing portfolio and gives the company instant access to many attractive Asian markets, including Indonesia and Malaysia.

Hershey’s further expansion in India

Since 2007 Hershey’s focus on Asia has strengthened as it has established joint ventures and manufacturing partnerships in the region. In India a joint venture with Godrej Beverages and Foods Ltd offers good opportunities to benefit from the dynamic growth of the Indian confectionery market. In China a business agreement with Korean conglomerate Lotte Group to produce Hershey and certain Lotte products for the Asian market has significantly strengthened Hershey’s presence in the region.

In June 2009 Godrej Hershey Foods and Beverages announced that it is planning to introduce products from Hershey’s international label to the Indian market. As part of the brand introduction strategy, Hershey’s Chocolate Milk Mix syrup is being extended nationally, while Hershey’s chocolate syrup has already been introduced and manufactured locally.

Godrej Hershey aims to expand margins with the change from bulk to branded items in commodities such as tea and cooking oil, eg Cooklite and Godrej Tea. Currently, only a small amount of Hershey chocolate is imported, but the label has not been formally launched in the country yet.

However, competition in the attractive Indian chocolate confectionery market is very strong from rival international players. Cadbury commands almost a 60% share of the fast growing Indian chocolate confectionery market and together with number two Nestlé, their overall value share in 2007 exceeded 90%. India is deservedly the focus of many companies’ expansion policies as it is a good example of a market in which economic growth is positively impacting demand for more expensive chocolate confectionery items, and there is room for growth.

Per capita consumption of chocolate confectionery in India in 2008 was still significantly below that of developed markets, at less than 0.1kg per year compared to 5.4kg in North America.

Benefiting from joint infrastructure

Hershey’s expansion strategy in new Asian markets is centred on joint ventures and business agreements and its partners’ established production and distribution facilities. This requires significantly less investment (its agreement with Lotte involved a 44% stake for US$39 million) but at the same time delivers dynamic revenue growth. In 2008 Hershey achieved 8% value growth in its net sales generated outside the US compared to 3% in its domestic US market.

In recent years Hershey has sought to reduce its heavy reliance on the slow growing North American market. In 2006 only 10.9% of its sales were generated in markets outside the US, which subsequently increased to 14.4% in 2008. However, rival American conglomerate Mars generated more than 55% of its confectionery sales outside the US market in 2007.

Keeping up the speed of expansion in new markets is vital if Hershey is to remain competitive in the international confectionery arena against the likes of newly-merged Mars-Wrigley and Nestlé. Although this expansion in new markets offers good growth opportunities, it also demands significant investment in marketing and brand building.